Global economy downshifting towards trend growth: Moody's

THE first half of 2022 will be challenging in the face of elevated commodity prices, demand-supply imbalances, inflation pressures, volatile financial markets and geopolitical tensions. But demand-supply distortions should resolve over 2022, with supply bottlenecks easing in the second half of the year, said Moody's Investors Service in a note on Feb 24.

The ratings agency said it expects the Group of Twenty economies to collectively expand 4.3 per cent this year. This is down from 5.9 per cent in 2021 but still above long-term trend growth. Global growth rate will further slow to 3.2 per cent in 2023 as pandemic-fuelled output losses have been largely recouped and labour markets in advanced economies approach a full recovery, it stated.

The current economic cycle is remarkable in the swiftness with which activity has been restored in most major economies, noted Madhavi Bokil, senior vice-president/CSR at Moody's Investor Services and one of the authors of the report.

However, elevated commodity prices, demand-supply imbalances which have resulted in high and, in some places, rising inflation, volatile financial markets, and a great deal of uncertainty make for a challenging economic backdrop.

"We expect demand-supply distortions to ease in 2022, with supply bottlenecks in particular lessening early in the second half of the year," she said.

Bokil further noted that the forecast does not apply uniformly to all countries, with China as a notable exception.

"The country's zero-Covid policy raises the likelihood of repeated and economically detrimental closures of manufacturing hubs and ports," she said.

"Since a transition to a less-stringent pandemic management policy would be inherently fraught with risk, we expect the Chinese authorities to continue to enforce restrictive measures until late 2022, and possibly beyond. Thus, the risk of repeated global supply chain disruptions also remains high."

Other emerging markets too are seeing staggered recovery. Unlike last year when emerging market economies made a strong comeback after the pandemic disruption, there is less certainty now.

Specifically, in Mexico, Brazil, and Argentina, recoveries are "losing steam" amid elevated inflation pressures. India's fiscal 2022-2023 budget, which focuses on infrastructure and other capital spending, will help consolidate growth, she said.

For advanced economies, the US is moving into a late-cycle expansion as the labour market approaches full employment, growth rates decelerate from 2021 peaks, policy support subsides and reopening momentum abates. Canada, Australia and Europe are experiencing similar growth dynamics.

Japan meanwhile is late to join the mid-cycle expansion with quasi-state of emergency measures still in place. Bokil said recovery for Japan is expected to pick up towards the middle of the year.

Separately, factors such as a potential worsening of the pandemic, repeated supply shocks, overly tight monetary policy and/or a fallout from China's property market downturn to other economies are several factors that could dampen the outlook.

The escalation of the Russia-Ukraine situation also poses risks to energy market stability and raises the prospect of potentially more severe sanctions on Russia.